1975, June, Pg. 1037. The Pension Reform Act of 1974: Part 6.

Authorby R. Michael Sanchez

4 Colo.Law. 1037

Colorado Lawyer

1975.

1975, June, Pg. 1037.

The Pension Reform Act of 1974: Part 6

1037Vol. 4, No. 6, Pg. 1037The Pension Reform Act of 1974: Part 6by R. Michael Sanchez, James F. Wood, and Douglas M. CainThe Employee Retirement Income Security Act of 1974 (the Act) alters dramatically the participation requirements for employee benefit plans.

Both the Tax and Labor Titles of the Act impose participation requirements. Differences exist in the applicability of the two titles and in their penalty provisions, but the titles substantively are quite similar.

As a general rule, no employee may be excluded from participation on the basis of age or service if he is 25 years old and has completed one year of service. Two variations to this rule are provided. Also, the Act strictly limits the situations in which employees may be excluded on the basis of maximum age. Furthermore, each plan now must provide for the admittance of eligible employees at specified times.

The old antidiscrimination tests are retained in modified form. In a significant change from prior law, businesses under "common control," as well as a group of employers who maintain a single plan or collectively bargained plans, are deemed to be one employer for antidiscrimination purposes.

The Act modifies substantially the definitions and concepts relating to service. A year of service is defined generally as the completion of 1,000 hours of service in a year, with special definitions to be developed by regulations for seasonal and maritime industries. The definition of hour of service is left entirely to the Secretary of Labor. A break in service is defined as a 12-month period in which the employee completes no more than 500 hours of service. An employee who works between 500 and 1,000 hours enters a "limbo" year, which generally counts neither for nor against the employee for participation purposes.

All service of an employee must be counted in determining whether he has completed his service requirement unless there is an exception in the Act. The Act provides for three specific and complex exceptions.

APPLICABILITY OF TAX AND LABOR TITLES

Both the Tax and Labor Titles of the Act include provisions which impose participation requirements on plans.(fn775) As with other sections of the Act, the provisions in the two titles are substantially alike. The major differences are the types of plans to which the two titles apply and their penalties for noncompliance. This article generally describes participation rules in terms of the tax requirements.

The participation rules of the tax provisions apply to all stock bonus, pension and profit-sharing plans(fn776) except governmental plans,(fn777) church plans,(fn778) plans established by certain fraternal orders and societies,(fn779) and plans which have not

1038provided for employer contributions at any time after September 2, 1974 (the Act's date of enactment).(fn780) These excepted plans must continue to meet the requirements of I.R.C. § 401(a)(3) as that section was written and interpreted prior to the Act.(fn781) In short, a plan not subject to the Act's participation requirements remains subject to the old participation rules.The consequence of not meeting the participation requirements of I.R.C. § 410 is that the trust of which the plan is a part fails to constitute a qualified trust.(fn782) No civil or criminal sanctions attach to violations of the Tax Title's participation rules.

The applicability of the Labor Title's participation requirements is governed generally by §§ 4 and 201 of Title I. Under § 4 of Title I, any employee benefit plan established or maintained by an employer engaged in interstate commerce or in any industry or activity affecting interstate commerce(fn783) is covered by the Labor Title unless it is a governmental plan,(fn784) a church plan,(fn785) a workmen's compensation plan,(fn786) a plan maintained outside the United States primarily for nonresident aliens,(fn787) or an unfunded excess benefit plan.(fn788)

Section 201 of Title I excludes a variety of additional plans from the participation requirements. Section 201 also applies to the Labor Title's vesting requirements and is similar to the coverage provisions of the fiduciary rules in Part 4 of Title I.(fn789) The additional exclusions in § 201 are welfare plans,(fn790) unfunded "top hat" plans,(fn791) excess benefit plans (whether funded or unfunded),(fn792) plans for employees of certain associations, societies or orders,(fn793) union plans which do not provide for employer contributions after September 2, 1974,(fn794) agreements under I.R.C. § 736,(fn795) and individual retirement plans under I.R.C. §§ 408 or 409.(fn796)

Qualified stock bonus, pension and profit-sharing plans are governed by both the Tax and Labor Titles. The Secretary of the Treasury will be chiefly responsible for the determination of the qualified tax status of such plans. Several regualtions which will affect the tax provisions are to be furnished by the Secretary of Labor; i.e., definition of hour of service.(fn797) Also, the Secretary of Labor may utilize his enforcement powers over qualified plans with respect to participation, but only if requested by the Secretary of the Treasury or if a participant, beneficiary or fiduciary requests the Secretary of Labor to protect claims to benefits under the plan.(fn798) If an employee pension plan covered under § 201 of Title I is not qualified, the participation provisions of the Labor Title govern.

A variety of remedies exists for violation of the Labor Title's participation requirements. The Labor Title mandates compliance with its provisions but does not provide any criminal sanctions or pre-set civil penalties.(fn799) Thus, as in the bonding requirements, the Act imposes requirements but does not describe with particularity the consequences of disobedience. The Labor Title's remedy for failure to comply with the participation requirements is found only in the general civil enforcement provisions of Part 5 of Title I. Section 502 includes several provisions by which participants, beneficiaries, fiduciaries, and the Secretary of Labor can obtain "appropriate relief" and a redress of violations.(fn800) Quite conceivably, such relief could include the imposition of civil liability on a plan or a fiduciary for losses occasioned by the plan's denial of an employee's right to participate. Also, a plan sponsor or fiduciary who caused a plan to forfeit its qualified status because of a failure to comply with the participation requirements might be liable for the consequences of the disqualification. In addition, a plan which fails to meet the Labor Title's participation requirements is subject to suit for enforcement of the Title's requirements and to injunctions for failure to comply with this Title.(fn801)

Even though no criminal penalties or pre-set civil liabilities attach, a plan which does not comply with the Act invites litigation. In addition, ignoring the participation rules will result in disqualification

1039of the plan. In sum, there is ample reason to comply with the participation requirements.AGE AND SERVICE RULES

Minimum RequirementsThe Act strictly limits the age and service requirements which plans governed by the participation rules of the Tax and Labor Titles can adopt. Before the Act, plans generally could exclude employees who had not attained a specified age or who had not been employed for a designated number of years, so long as the effect was not discriminatory in favor of officers, shareholders, supervisors, or highly compensated employees. Also, plans could impose a maximum age if the effect was nondiscriminatory, and certain part-time employees were excludable. The new requirements of the Act ensure that as many employees be covered by private pension plans as possible, and that they be covered as soon as possible, because an employee's ultimate pension benefits usually are greater the more years of participation he has in the plan. This is particularly important for employees who change employers during their careers. Early participation also tends to spread the cost of providing employees with adequate pensions more evenly over the various firms for which the employee has worked during his career, rather than concentrating the cost with his last few employers.(fn802)

As a general rule, for participation purposes no qualified plan and no plan covered by the Labor Title may require a period of service with the employer extending beyond the following dates: (a) one year of service, or (b) age 25.(fn803) In other words, a plan need not include an employee as a participant until age 25 even though the employee has worked more than one year. An employee over age 25, however, must be eligible when he completes one year of service. Thus, while an employee still may be excluded from participation for other reasons, i.e., salaried only plans, the general rule is that employees who have completed at least a year of service and are age 25 or more may not be excluded on the basis of age or service.

A trade-off is allowed with respect to the service requirement. A plan may require as many as three years of service (and attainment of age 25) if it provides for immediate 100 percent vesting for each participant upon commencement of participation.(fn804) This option could prove advantageous to the principals of an organization with high turnover. However, all plans remain subject...

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